Thursday, August 29, 2019

Improper Business Practices - Subcontractor Kickbacks

FAR (Federal Acquisition Regulations) Part 3 is the source for information and guidance necessary to ensure the integrity of the Government's procurement system. It not only applies to Government agencies and employees but to contractors and subcontractors as well.

It includes sections on the prohibitions of gratuities to Government personnel, contingent fees, subcontractor kickbacks, "buying in"and anti-trust matters. Specific to contractors and subcontractors, FAR Part 3 covers whistleblower protections to contractor employees, requires codes of business ethics and conduct, and prevention of personal conflicts of interest for contractor employees performing acquisition functions. Its also the section that requires contractors and subcontractors to implement reasonable procedures to prevent and detect violations of the Anti-Kickback Act.

Over the next few posts, we will be examining some of these "improper business practices" with the idea that Government contractors and subcontractors will be in a better position to assess their own policies and procedures for compliance with the standards set by procurement regulations. We begin with the coverage in FAR 3.502, Subcontractor Kickbacks.

The term 'kickbacks' shouldn't really need to be defined - everyone knows intuitively what they are. But FAR includes a definition:
... means any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind ... for the purpose of improperly obtaining or rewarding favorable treatment ...
Under FAR 52.203-7 (and its statutory basis at 41 USC 87), any person (including legal entities) are prohibited from

  1. providing or attempting to provide or offering to provide any kickback
  2. soliciting, accepting, or attempting to accept any kickback, or
  3. including, directly or indirectly, the amount of any kickback in the contract price charged by a prime contractor (or any level of subcontractor)

But the clause has other pro-active aspects. It requires contractors and subcontractors it have in place and follow reasonable procedures designed to prevent and detect possible violations of the anti-kickback prohibitions in its own operations and direct business relationships.

Procedures designed to prevent and detect kickbacks in an organization are not so obvious or easy to implement. Based on our experiences with many contractors, most of them have not implemented policies and procedures designed to detect and prevent kickbacks. Have you?

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